A candlelit memorial for the 20 children and 6 adults who were killed at Sandy Hook school in Newtown, Connecticut. Photograph: Ivan Virovets/Corbis

US private equity firm is selling its stake in the firearms company that made the AR-15 rifle used to shoot dead 20 children in a primary school in Newtown, Connecticut, last week.

Cerberus Capital Management said on Tuesday it was preparing for a sale of its investments in Freedom Group in the wake of the "unthinkable" massacre in the town where the father of its founder and chief executive, Stephen Feinberg, lives.

The investment fund had come under intense pressure from politicians and investors, including teachers' pension funds, to sell its stakes in America's biggest military-style rifle manufacturer.

Cerberus, which manages more than $20bn (£12bn) of investments, said Adam Lanza's massacre of 20 children and seven adults was a "watershed moment" that raised the debate on gun control to an "unprecedented level". Cerberus said it was not the company's role to enter the debate but added: "There are, however, actions that we as a firm can take. "Accordingly, we have determined to immediately engage in a formal process to sell our investment in Freedom Group."

"As a firm, we are investors, not statesmen or policy makers. Our role is to make investments on behalf of our clients, who are comprised of the pension plans of firemen, teachers, policemen and other municipal workers and unions, endowments, and other institutions and individuals. It is not our role to take positions, or attempt to shape or influence the gun control policy debate. That is the job of our federal and state legislators."

Cerberus, which was founded by Feinberg, an avid shooter and hunter, in 1992, said it was "shocked and deeply saddened" by the shooting on Friday and it "cannot comprehend the losses suffered by the families and friends of those killed by the unthinkable crimes". The investment fund had built Freedom Group into America's biggest manufacturer of semi-automatics with a series of company acquisitions, including Remington Arms and Bushmaster Firemaster, which made the .223 Bushmaster semi-automatic rifle – the one believed to have been used by Lanza.

In its latest financial statement, Freedom said the market for military-type weapons grew by 27% between 2007 and 2011. "The continued adoption of the modern sporting rifle has led to increased growth in the long gun market, especially with a younger demographic of users and those who like to customise or upgrade their firearms," it said.

Freedom said the increase in demand would have "significant long-term benefits" for the firm. It reported a 43% rise in profits before interest and tax and other charges to $118m in the nine months to the end of September. Over the same period sales increased by 19% to $677m.

Freedom sold 1.2m rifles and 2.6bn rounds of ammunition in the 12 months ended March 2010, the most recent year for which figures are publicly available. In a filing with the US Securities and Exchange Commission (SEC) last year it said: "We believe our scale and product breadth are unmatched within the industry."

The company recently appointed two senior retired generals - George Joulwan, formerly supreme allied commander of Europe, and Michael Hagee, formerly commandant of the Marine Corps - to its board. Cerberus, which is headquartered on Park Avenue in Manhattan, also boasts Dan Quayle, a former vice president, as the chairman of its global investment group.

George Kollitides, Freedom's chairman and interim chief executive, has tried unsuccessfully to run for a seat on the board of the National Rifle Association (NRA), the powerful pro-gun lobbying group.

Last month Freedom's finance director Ronald Kolka, disclosed that it had donated $2m to the NRA. He also told analysts that the re-election of Barack Obama had caused a "very, very positive effect on our business" because of fears Obama would crack down on guns.

Obama told a vigil in Newtown on Sunday: "We can't tolerate this any more. These tragedies must end and to end them we must change." Shares in listed firearms companies Smith & Wesson and Sturm Ruger, which had soared over the past year, have dropped by 20% and 14%, respectively, since the Newtown shooting.

Annual US sales guns and ammunition total about $4bn, according to estimates from the National Shooting Sports Foundation.

Cerberus, which controls companies that generate annual revenue of $40bn - more than that of McDonald's or Coca-Cola, is a notoriously private firm has not previously bowed to public pressure. In 2007, Feinberg told shareholders that: "If anyone at Cerberus has his picture in the paper and a picture of his apartment, we will do more than fire that person. We will kill him. The jail sentence will be worth it."

Feinberg's father, Martin, who lives in Newtown, said the shooting was "devastating."

Politicians, investors and well-known commentators had been mounting pressure on Cerberus to sell its stake in Freedom since the shooting on Friday. The California State Teachers' Retirement System (CalSTRS), the second-biggest pension fund in America, had threatened to withdraw the $751m it had invested in Cerebus unless the private equity fund sold out of the firearms company.

Californian's treasurer Bill Lockyer said he will propose that CalSTRS and California Public Employees' Retirement System (CalPERS) – the two biggest pension funds in the US – sell off all investments in firearms manufacturers that make guns prohibited under state law. California prohibits semi-automatic assault weapons, specifically including the Bushmaster, and magazines that can hold more than 10 rounds of ammunition.

Eliot Spitzer, the former governor of New York and the former New York State attorney general, said: "Every student at a university should ask the university if it is invested in Cerberus."

"Every member of a union should ask their pension-fund managers if they are invested. Information is the key first step. From there, action will quickly follow," he wrote in a comment article for Slate.

Dick's Sporting Goods, a guns and sportswear company that had invested in the UK's JJB Sports, has stopped selling all guns at its store closest to Newtown, and suspended the sale of some semi-automatic rifles from its chains nationwide. Wal-Mart, the world's largest retailer and owner of Asda, has withdrawn the rifle used by Lanza from its online stores.